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Number Theory: Atmanirbharta may help India’s other oil problem

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The ongoing increase in fuel prices – petrol prices increased to .89.89 per litre in Delhi on February 18 – has been making a lot of headlines. While the current surge is on account of rise in crude oil prices, the fact that both central and state governments, especially the former, have not brought down taxes on fuel has not helped. The base price of petrol in Delhi was just .31.82 per litre on February 16, according to data from the Indian oil website.

Speaking at an event in Tamil Nadu, Prime Minister Narendra Modi linked the issue with India’s high import-dependence for energy needs. “Can a diverse and talented nation like ours be so energy import dependent?” he asked, addressing an online event to inaugurate oil and gas projects in poll-bound Tamil Nadu. “I do not want to criticise anyone but I want to say (that) had we focused on this subject much earlier, our middle-class would not be burdened.”

India imports more than 80% of its crude oil requirement. To be sure, self-dependence in petroleum is contingent on having crude petroleum reserves, which India does not have in large amount, but India could tap other sources of energy, such as solar – which is what it is now doing. Interestingly, the PM’s cue for the pursuit of self-dependence is relevant for another oil problem facing India, that of edible oils.

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1. Edible oil inflation has been very high in post-Covid phase

Even though food inflation has fallen sharply in the last three months, inflation in edible oils continues to stay high. Average annual growth in retail inflation for edible oil and fats was 1.3% between January and December 2019. This increased to 12.3% between January and December 2020. The annual growth in inflation for this category was 19.7% in January. Edible oil and fat category has a weight of 3.56% in the Consumer Price Index (CPI) basket, which is more than the 2.38% share of pulses, and more than half of the 6.04% for vegetables. Clearly, edible oils are an important driver of food inflation.

2. Vegetable oils, not animal fats are driving up inflation in this sub-category

Like all sub-categories, the edible oil and fats sub-category is divided into individual commodities. These include mustard oil, groundnut oil, coconut oil, refined oil (sunflower, soyabean oil etc.), ghee, butter and vanspati, margarine. Among these, mustard oil (1.36%) and refined oil (1.26%) account for almost three-fourth of the total weight of this category (3.56%) in the overall CPI basket. A sub-category wise analysis shows that the hike in edible oil and fat inflation is mainly because of a sharp rise in prices of mustard oil and refined oil, even as inflation in animal fats (ghee and butter) has been falling during this period.

3. International prices of edible oils will generate more tailwinds for refined oil prices

India is one of the largest importers of edible oil/oilseeds in the world. FAOSTAT database of the United Nation’s Food and Agricultural Organisation (FAO) shows that India had a share of 0.9% in total vegetable oil and fat imports in the world in 1961. This increased to 12% in 2019, the latest period for which data is available.

This import-dependence has two downsides. One, it deprives Indian farmers of lost income opportunities which go to foreign producers. Two, it makes Indian consumers vulnerable to international price spikes in the edible oil market, which have risen sharply in the post Covid-period. The (edible) oil component of FAO’s Food Price Index was at 77.8 in May 2020. This has increased to reach 138.8 in January, the highest value since May 2012. The sharp rise in prices is a result of production shocks in many important oil producing countries.

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“The index’s eighth consecutive monthly increase mainly reflected higher palm, soy and sunflowerseed oil prices. With palm oil production in both Indonesia and Malaysia turning out lower than expected due to excessive rainfall (and, in the case of Malaysia, continued shortages in migrant labour force), international palm oil quotations climbed to eight-and-a-half year highs. Meanwhile, international soyabean oil prices rose for the eighth month in succession, fuelled by reduced export availabilities and prolonged strikes in Argentina. As for sunflowerseed oil, continued rising prices stemmed from lingering global supply tightness owing to sharply reduced 2020/21 sunflowerseed harvests” the FAO website says.

4. Mustard alone can bring down dependence on import

Unlike in the case of crude oil, India can pursue self-reliance in edible oil production to insulate itself from international prices. Mustard oil is the most important component of the edible oil and fats category in the CPI basket. This is also the category which has been an important driver of edible oil inflation in recent months. Statistics on production, yield and area under cultivation for mustard from the Centre for Monitoring Indian Economy (CMIE) database show that mustard has not been one of the best performing crops in Indian agriculture in the recent period. A decadal analysis of compound annual growth rate (CAGR) shows that mustard had its best performance in the 1980s and both production and area under cultivation growth actually reduced in the 2010s compared to the previous decade. There is no reason why a concerted policy focus cannot revive the performance of mustard, which may also substitute other imported vegetable oils if costs can be brought down, at least in the northern and eastern parts of the country. Perhaps Punjab, which has emerged as the epicentre of the ongoing farmers’ protests could be a good region to launch the amta-nirbharta programme for edible oils.

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